Section 17(5) of CGST Act | Blocked ITC under GST
Category: GST, Posted on: 19/10/2022 , Posted By: Webtel
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As per the CBIC guidelines, as mentioned in Section 17(5) of the CGST Act for blocked credits, ITC is not available for the purchase of certain goods and services.
Every regular taxpayer must be aware of the Input Tax Credit (ITC), which is the tax paid by the registered person in the form of CGST, SGST or UTGST and IGST that is charged at the time of sale of goods or services made to the registered person. ITC essentially refers to the credit claimed over GST paid on the purchase of goods and services, used for the furtherance of business.

What is Section 17(5) of the CGST Act for Blocked Credits?

The blocked credits, as defined under Section 17(5) of the CGST Act, is a provision for every regular taxpayer, that expands upon the list of purchases that are not eligible for ITC claim, that is, the purchases on which GST has been paid but the business cannot claim Input Tax Credit (ITC) over the same.
This blog will take you through a detailed overview of a clause-wise explanation of Section 17(5) of the CGST Act, whereby, the details of blocked ITC will be discussed.

How to report Section 17(5) of the CGST Act in GSTR 3B

The ineligible ITC claimed but needs to be reversed by the recipient or buyer shall be reported while filing GSTR 3B for the month or the quarter as per Section 17(5) of the CGST Act. These values of ineligible ITC under Section 17(5) must be reversed in Table 4(B) instead of Table 4(D) of GSTR 3B from July 2022.
Know about the recent changes and amendments in GSTR 3B: Recent GST Update on GSTR-3B
On comparing the ineligible ITC mentioned in the books of accounts varies from that given in GSTR 2B, such ineligible ITC must be reversed in GSTR 3B of the following month/quarter along with the required interest.

What happens if you claim ineligible ITC?

As given under Section 17(5) of the CGST Act for blocked ITC, in the case of non-compliance with the clauses mentioned therein, the recipient or buyer must reverse the wrongfully claimed ITC or they may incur an interest rate of 24% from the date of such claim.

Clause-wise Explanation of Ineligible ITC, as mentioned in Section 17(5) of the CGST Act

As defined under Section 17(5) of the CGST Act for blocked credits, input tax credits shall not be available under the following conditions,

Clause

Explanation

Clauses (a), (aa), and (ab) – Purchase of Conveyance and Transportation

(a) Motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:-

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

Clause (a) of Section 17(5)-

ITC cannot be claimed on the purchase of motor vehicles with a seating capacity of over 13 people.

Exceptions

  1. For the purchase of vehicles for retail at automobile retail houses and manufacturing establishments.
  2. Purchase vehicles for passengers’ transportation, as in the case of cabs, bus rentals, or lease services.
  3. Purchase a vehicle for training on driving such motor vehicles, as in the case of driving schools.

(aa) Vessels and aircraft except when they are used-

(i) for making the following taxable supplies, namely:-

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;

Sub Clause (aa) of Section 17(5) mentions that ITC cannot be claimed for the purchase of vessels and aircraft, except in the following cases,

  1. For the purchase of vessels and aircraft for retail at automobile retail houses and manufacturing establishments.
  2. Purchase of vessels and aircraft for the transportation of passengers, as in the case of cabs, bus rentals, or lease services.
  3. Purchase of vessels and aircraft for training on driving such motor vehicles, as in the case of driving schools.

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available-

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged-

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;]

ITC cannot be claimed on the GST paid concerning any related service such as insurance, servicing, or repair and maintenance of motor vehicles, vessels, or aircraft, as defined in clauses (a) and (aa).

Expectations, as subject to clause (ab) of Section 17(5) are listed below,

  1. In case the motor vehicles, vessels, or aircraft are used for a purpose as referred to in clauses (a) or (aa).
  2. For the manufacturing of the conveyances listed above, and the supply of general insurance services for such conveyances by an insurance company.

Clause (b) – Purchase of Food, Catering, Vehicle Renting, Club, & Travel

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness center; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

(i)      ITC cannot be claimed on the GST paid for,

  1. Purchase of food and beverages.
  2. Expenses incurred on outdoor catering.
  3. Expenses paid for beauty treatments, cosmetics, and plastic surgery.
  4. Spending on health care services.
  5. Renting, leasing, or hiring conveyances mentioned in clauses (a) and (aa), subject to exceptions mentioned therein.
  6. Purchase of life insurance and health insurance.

 

Note: ITC is available when the inward supply of goods and/or services is used by the taxpayer for making an outward taxable supply.

(ii)    ITC is not available for club memberships, and expenses incurred on health and fitness centers.

(iii)   ITC cannot be claimed for travel benefits provided to an employee for vacations.

 

Note: ITC is available in respect of goods and/or services where the employer must provide the same to the employee as per legal guidelines.

Clauses (c) and (d) – Expenses on Building Construction

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

As defined under Section 17(5) of the CGST Act, ITC is not available for the expenses incurred on work contract services for the construction of an immovable property, except in the case of input services for the further supply of work contract services.

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. 

Explanation.-For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

Section 17(5) of the CGST Act defines that ITC is not available for the purchase of goods and/or services for the construction of immovable property, including the purchase of goods and/or services in the business.

 

Note: The term “construction” is inclusive of re-construction, renovation, additions, alterations, or repairs to the extent of capitalization.

Clauses (e) and (f) – Expense Composition and Non-resident

(e) goods or services or both on which tax has been paid under section 10;

Under Section 17(5), ITC cannot be claimed for the payment of tax under Section 10 of the GST Act, 2017.

Note: Under the composition scheme, Section 10 of the GST Act, the tax cannot be charged by the supplier from the recipient, and accordingly question of ITC availed by the recipient does not arise.

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

Section 17(5) also states that ITC cannot be claimed for the purchase of goods and/or services by non-residents, except for the goods and/or services exported by them.

Clause (g) – Expenses for Personal use

(g) goods or services or both used for personal consumption;

ITC is available only for the supplies taken for business purposes and not for the supplies taken for personal use.

Clause (h) – Free sample & lost

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

Clause (h) of Section 17(5) mentions that ITC is blocked for the goods that have been lost, stolen, destroyed, written off, or disposed of. This includes gifts and free samples.

Clause (i) – Fraudulent ITC claims

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

Lastly, as per the provisions of Section 17(5), ITC cannot be claimed in case of earlier non-payment of taxes, excess refund, excess ITC availed willfully, misstatement of suppression of facts, and so on, as stated in Sections 74, 129, and 130.



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